Why don't senior lenders offer mezzanine finance to property developers?
This article is a part of our series on PDLs, in it we explore why senior lenders don't always offer mezzanine finance.
There are a number of funding providers across a range of company types which will offer senior lending to property developments. The largest providers are typically the mainstream banks either directly or indirectly through specialist property lenders.
What do senior lenders think about mezzanine finance?
Senior lenders are limited in the finance they can offer because of capital adequacy and the balance they need to achieve across their entire loan book.
The Bank of England requires the lenders to abide by a capital adequacy level across all the loans that are made. Higher Loan to Value (LTV) loans, by necessity, have higher capital adequacy requirements.
This means that senior lenders prefer to have a lower cap on the lending they make, so that they do not exceed their overall capital adequacy levels. Put simply, the more control they have over this, the greater the number of loans they can make, and therefore the higher the returns they can enjoy. For a senior lender, quantity is key - more loans, rather than loans for higher LTV amounts, means more profit.
This means senior lenders will often only lend on a lower Loan to Value, leaving a market opportunity for those who are prepared to top this up to a higher loan to value. Or, in other words, the opportunity for mezzanine lending.
Why don't senior lenders offer mezzanine finance?
Whilst some lenders do provide mezzanine finance, it is largely the preserve of specialists.
The work required to set up larger loans is largely the same as the work required to set up smaller mezzanine loans. So this means for senior lenders their time is better spent organising and administrating larger loans which generate more fees for them.
Specialists work solely on mezzanine finance and not on providing senior lending, so their business model is set up to accommodate this.
Crowdstacker has created PDLs to service the niche, but very necessary market, supplying greater levels of finance to property developers.
You can find out more about our current PDLs and the rest of the series on PDLs below:
What is a Property Development Loan?
What type of finance is a PDL?
The key differences between a PDL Loan and a traditional P2P business loan
Why do PDLs offer higher interest rates?
Why don't senior lenders offer mezzanine finance?
Why do property developers need mezzanine finance?
What determines when a PDL starts earning interest?